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    annuity and dividends for common stocks.

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    1) Morgan Jennings, a geography professor, invests $50,000 in a parcel of land
    that is expected to increase in value by 12 percent per year for the next five
    years. He will take the proceeds and provide himself with a 10-year annuity.
    Assuming a 12 percent interest rate, how much will this annuity be?

    2) Folic Acid, Inc., has $20 million in earnings, pays $2.75 million in interest to
    bondholders, and $1.80 million in dividends to preferred stockholders.
    a. What are the common stockholders' residual claims to earnings?
    b. What are the common stockholders' legal, enforceable claims to dividends?

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    Solution Preview

    Final answer to be explained thoroughly.

    1) Morgan Jennings, a geography professor, invests $50,000 in a parcel of land
    that is expected to increase in value by 12 percent per year for the next five
    years. He will take the proceeds and provide himself with a 10-year annuity.
    Assuming a 12 percent interest rate, how much will this annuity be?

    First, you need to find the value of the land after five years. You can use future value formula to calculate as follows:

    FV = PV (1+R)N where PV is the present value of the land
    R is the interest rate
    N is the period

    FV = $50,000(1 + 0.12)5
    FV = $50,000(1.7623)
    FV = ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer how much the annuity Morgan Jennings receive, what are the common stockholders' residual claims to earnings, and what are the common stockholders' legal, enforceable claims to dividends.

    $2.19

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